Yahoo Finance Does Deutsche Lufthansa AG’s (FRA:LHA) PE Ratio Signal A Buying Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Deutsche Lufthansa AG (FRA:LHA) is trading with a trailing P/E of 4.7x, which is lower than the industry average of 10.4x. While LHA might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Deutsche Lufthansa
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for LHA
Price-Earnings Ratio = Price per share ÷ Earnings per share
LHA Price-Earnings Ratio = €23.54 ÷ €5.026 = 4.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LHA, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 4.7x, LHA’s P/E is lower than its industry peers (10.4x). This implies that investors are undervaluing each dollar of LHA’s earnings. This multiple is a median of profitable companies of 22 Airlines companies in DE including Mesa Air Group, SAS and International Consolidated Airlines Group. As such, our analysis shows that LHA represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy LHA immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to LHA, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with LHA, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing LHA to are fairly valued by the market. If this is violated, LHA’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of LHA to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for LHA’s future growth? Take a look at our free research report of analyst consensus for LHA’s outlook.
Past Track Record: Has LHA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of LHA’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
